TOM LEE: A US Debt Default Would Be Really Bad News For The Stock Market

With a year-end S&P 500 target of 1775, JPMorgan's Tom Lee is
the most bullish equity strategist on Wall Street.

In a
note to clients earlier this week when the government
shutdown began, Lee argued that the worst of the sell-off in the
stock market related to the shutdown was likely behind us,
writing, "thus, we would remain steady buyers of
equities."

In a note today, Lee says the market is better off this
time around than in August 2011 — the last time Congress had to
authorize an increase of the nation's statutory debt
limit.

"In contrast to
2011, economic circumstances are notably better.In 2011, confidence in global
growth was tenuous at best — U.S. housing and autos had yet to
turn positive, the euro area was still gripped in an economic
crisis and Japan remained mired in malaise," writes Lee. "Thus,
the debt ceiling and resulting fiscal cliff raised multiple
concerns about tipping the global economy back into recession. In
contrast, many economists in 2013 argue that global growth is
being held back by US fiscal uncertainty."

However, the one thing that
could derail Lee's positive view is a debt ceiling
accident.

"We believe the risk of a U.S.
debt default is not high enough at the moment to justify selling
— but to be clear, a debt default would have serious negative
consequences to our positive thesis on equities were it to
occur," says Lee. "As we
noted earlier in the week, equity markets have shown decent
performance once a shutdown begins. The greater risk, obviously,
is of a potential debt default. As we noted above, this does not
yet appear to be a material concern of the debt markets (as
evidenced by CDS spreads) and we believe both political parties
have enormous interest in avoiding this outcome as well."

Ultimately, Lee thinks the effect the shutdown is having on
Federal Reserve monetary policy is supportive of the market.

"Fed now likely on hold longer,
which provides a decent insurance policy for markets," writes
Lee. "Finally, the
government shutdown will make getting a clean read on the
economic data more difficult for several months. Thus, market
expectations for Fed tightening are now pushing out, which is
lowering interest rates and is short-term helpful for
equities."